Volume 1, No. 4, Summer 1997

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Business Transaction: RDO EQUIPMENT Co.

2829 South University Drive
Fargo, North Dakota 58109
(701) 237-7363
NYSE: RDO

Glamorous and exciting industries such as computer software, medical product manufacturing and entertainment have spawned many recent initial public offerings (IPOs). Not all IPOs, however, involve companies in glamorous industries. RDO Equipment is the largest distributor of John Deere agricultural and industrial equipment in the United States and it had its initial public offering on January 29, 1997.

Riding the Wave of Industry Consolidation
Deere & Company is the leading supplier of agricultural equipment in the United States, and one of the leading suppliers of industrial equipment for light and medium applications. Deere's industrial equipment dealers are assigned geographically exclusive territories in which a single dealer can operate multiple stores. The enduring popularity of Deere products makes a Deere dealership a valuable franchise. RDO Equipment has 32 stores where it sells, services, and rents John Deere industrial and agricultural equipment.

Over the last five years, while the number of Deere industrial s~on's has remained constant, the number of Deere industrial dealers has declined by more than 30%. Traditional, independent dealerships (often family operated), commonly lack the capital, management depth and operational economies available to larger dealers.

Over the past five years RDO Equipment has acquired 13 stores from seven dealers, including five stores in 1996. Due in large part to these acquisitions, RDO's revenues have grown at a compound annual rate of 38% over the past five years, from $71.2 million in 1992 to $223.6 million in 1996. RDO's 21

industrial stores accounted for approximately 6% of Deere's United States industrial equipment sales in calendar 1995 and its 11 agricultural stores accounted for approximately 1~4 of Deere's U.S. agricultural equipment sales.

In order to capitalize on industry consolidation trends, RDO intends to focus on increasing the market share of parts and service business at existing stores, acquiring additional stores, pursuing aggressive marketing programs, managing administrative functions at the corporate level (thereby freeing store employees to focus on customers), providing a full complement of parts and state-of-the-art service functions such as computerized inventory, controlling costs at the store level and diversifying operations geographically.

Deere products account for approximately 7204 of RDO's new equipment sales, and Deere supplies floor plan financing of RDO's inventory. The continued success of Deere & Company is crucial to RDO, as is Deere's continued willingness to work with RDO. Deere has the option to terminate RDO's dealerships under a number of different circumstances, including a change in control of the company from Ronald D. Offutt.

On January 29,1997 RDO Equipment's initial public offering of Class A stock sold out all 4,200,000 shares, plus an additional 630,000 shares to cover the Underwriter's over-allotment. The offering occurred at $15.50 per share, resulting in gross proceeds of $74,865,000. Just prior to the IPO, the company reincorpora ted itself from a North Dakota S Corporation into a Delaware C Corporation. After deducting estimated underwriting discounts, commisions and offering expenses RDO's net proceeds are expected to be $68,600,000. Approximately $10,100,000 of the proceeds will be used to repay indebtedness related to RDO's recent acquisitions; ~5,000,000 (representing the undistributed accumulated net income of the S Corporation) will be distributed to existing stockholders and the remaining $43,500,000, will be used to finance future acquisitions, new stores, internal growth and other general corporate purposes. RDO hopes to be in the forefront of the consolidation trend in its industry. As of February 26, 1997 the stock has traded in a range from $15.75 to ~9.00 per share.

Parting Comments
Even if one individual would have purchased 100% of RDO's Class A Common Stock IPO, he or she still would not control the company because each Class A share has one vote and each Class B share has 4 votes. Ronald D. Offutt owns 100% of the Class B stock and therefore retains 83.9% of the combined voting power of all classes of RDO voting stock. Despite the fact that one individual retains complete control of the company after the IPO, the offering price of RDO's stock values the company at approximately 25.71 times its pro forma fiscal year end January 31, 1996 earnings (adjusted to reflect C corporation status and to reflect earnings from 1996 acquisitions as if they had occured on February 1, 1995), while the S & P 500's overall price to earnings ratio is estimated to be between 16 and 20 (depending on how it is calculated). The question that begs to be asked here is: Where is the minority discount?

Were investors willing to ignore the inferior voting rights of RDO's Class A stock because minority interest investors do not care about control as much as they care about growth, and RDO has an excellent record of revenue growth? Was the controlling shareholder unwilling to sell his shares for less than a pro rata share of the control value? Was the company actually worth 20% to 40% more than the offering price because the premium for control is inherent in minority interests? We will never know for sure, however it appears that in this instance shareholders were paying controlling interest value for small minority interests.